Commentary: US manufacturing is at the tipping point, boosting the economic outlook

10 January 2014 09:47[Source: ICB]

2014 is set to be a year of improving fundamentals for the US economy with accelerating industrial production from a robust manufacturing sector

You would hardly characterise Kevin Swift as a wild-eyed optimist. The chief economist of the American Chemistry Council (ACC) and aficionado of financial history has seen his share of economic and chemical cycles. And prognostications, even through the most rose-coloured lenses of those in his profession, tend to be heavily caveated.

So when Swift projects the most positive outlook I can remember (in my almost 17 years covering the sector) for both the US economy and the chemical sector for 2014, it’s worth taking notice. For once, it’s not cautious optimism – just outright optimism.

More tyre production plants are slated for the US

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Key components such as industrial production, personal income and employment are set to improve further, in his view. “2014 will be a year of improving fundamentals and we could see positive surprises. The risk is to the upside,” said Swift at a meeting of the Chemical Marketing & Economics Group in New York.

Manufacturing has driven the US economic recovery since 2009 and will continue to do so in the coming years. This has been aided in no small part by the US shale gas boom, he noted.

“We have reached a tipping point in manufacturing. This tipping point in downstream consumer industries [of the chemical sector] points to strong domestic demand, which also aids specialty chemicals,” said Swift.

The economist pointed to new manufacturing facilities being built in the US such as three new tyre plants plus one expansion in South Carolina.

Along with the US, “the global industrial cycle is beginning to turn upwards,” with Europe now emerging from its second recession and China and emerging markets poised to improve, he added. Inflationary pressure is largely non-existent, and monetary policy is accommodative worldwide, “with various versions of QE [quantitative easing]”.

For the strong US economic progress since 2009, “nothing on the horizon suggests that this will end. We should see at least a couple more years of a good run,” he said.

So what could derail the US economy’s momentum? Another shift down in China’s growth rate caused by excessive debt and resulting credit contraction, and a monetary policy shift towards tightening credit by the US Federal Reserve appear to be the main risks – the known unknowns. But developments in these areas and elsewhere must be gauged. When a major downturn strikes, it’s rarely telegraphed.